Consider a $10 billion increase in government spending and investment. The IS curve
A) shifts to the right to reflect their combined stimulus.
B) shifts to the right, for any interest rate, a distance equal to the multiplier times $10 billion times 2 to reflect first the stimulus of government spending and second that of the increased investment.
C) shifts to the right in parallel unless the responsiveness of investment to changes in the interest rate were to change.
D) shifts to the right and gets flatter if the stimulus caused investment to become more sensitive to changes in the interest rate.
E) all of the above.

Question

Quizplus · Accepted Answer

Each statement describes a way in which an increase in government spending and investment can affect the IS curve: A) reflects the basic idea of a stimulus shifting the curve rightward; B) incorporates the multiplier effect, which amplifies the initial stimulus; C) suggests a parallel shift unless investment's sensitivity to interest rates changes; D) indicates that a change in investment sensitivity to interest rates would affect the curve's slope. Thus, all these statements are correct in the context of how fiscal policy impacts the IS curve.

Consider a $10 Billion Increase in Government Spending and Investment